The pace of change in the cash markets is not set to slow down in 2018. This is partially due to the introduction of new US tax rules, which became effective as of 1st January this year. These rules are expected to generate wholesale changes in how multinational corporations use US dollar denominated cash management products.
Designed to make the United States more competitive with other countries, support economic growth and reduce complexity, the tax bill brings in several key changes. Most notably it has slashed the US corporate tax rate from 35% to 21%. It has also mandated a one-time deemed repatriation rate on tax-deferred foreign earnings held offshore, set at 15.5% for liquid or cash assets and 8% for illiquid assets. This will impact as much as US$3trn of assets held overseas by US corporations.
“It is important to note that this contrasts with the voluntary repatriation tax holiday of 2004,” says Tom Kolimago, Cash Management, Head of Credit and Investment Research at BlackRock. “The tax is mandatory and all companies will be taxed on their overseas earnings; they don’t have to bring them back to the US if they don’t want to.”
That being the case, will there be a mass exodus of cash to the US from Asia Pacific? Crystina Hickey, Institutional Cash Sales Asia at BlackRock, does not think so. But there is some activity expected. “We are still in the early days and the signs are that corporates are not planning to send significant amounts of cash back to the US,” she says. “But some clients have already begun to make changes to their portfolios. These include the shortening of positions to allow cash to be moved back to the US if required.”
The main reason that corporates are looking to move cash back to the US is to pay down debt, explains Hickey. “However, some are looking to pursue various M&A opportunities within the US,” she adds.
If, and then how quickly, corporations send cash back to the US, will have a big role in dictating the impact US tax reform has on the short-term funding markets. But the effect cannot be analysed in a vacuum, warns Kolimago. He cites the normalisation of interest rates by the Fed, with three hikes expected in 2018, as one key macro event that corporate investors need to watch out for.
This creates some interesting opportunities for cash investors in Asia Pacific. “The rate hikes that we have seen throughout 2016 and 2017 have definitely made for some more attractive investment opportunities for corporates in the region using the US dollar,” says Hickey. “As a result, we have started to see many treasury teams expand the types of investments that they are using to manage their cash.”
Hickey notes that prudent cash segmentation is required for corporates looking to optimise their overall cash investment portfolio. “It ensures that they have the flexibility within their guidelines not only to seize on investment opportunities but to do so without taking on undue risk,” she explains. This is especially true for emerging Asian companies that may not have well-detailed treasury policies in place. “In these instances, we advise that they work in partnership with a trusted asset manager to understand best practice and put in place an investment strategy that caters for their needs.”
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